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Sunday, August 4, 2013

Medium-Term Elliott Wave Analysis of Gold

Since the last update, Gold has staged a nice rally from 1280s to mid 1330s. Recent rise from 1180 low has taken up a 5-wave form, which suggests that there is a very high potential that Gold Market has put in an intermediate term bottom. In this post, we discuss Gold's medium term Elliott Wave structure to understand future trajectory. This analysis will help us further understand whether Gold has bottomed or not. Time frame of market data starts from September 2011 Gold top.

In September 2011, Gold prices topped above $1900. I can vividly remember that at that point in time, we were reading news about Gold dispensing ATMs, Mr. T was on TV with his gold jewelry, analysts were forecasting $5000 gold, and news articles were proclaiming record Gold prices. In fact, on a personal account few of my family friends went to New York to purchase physical Gold because they were amazed by the 10 year Gold bull market. This anecdotal evidence alerted me that something was wrong with the Gold market.

Incidentally, that was the time when Gold market was topping. And since then it has declined for almost two years. Following chart shows this decline in its entirety:

Gold Decline - Sept 2011 to Aug 2013

Gold's decline has taken up a classic 3-wave decline form. This decline can be labeled as W-X-Y, with a sequence of 3-3-5. Typically, a 3-3-5 pattern is attributed to a market correction because it corrects a rally. Since Gold rallied from ~$200 to ~$1900 in little more than 10 years, we have seen a sharp correction to take back some of those gains.

This 3-3-5 pattern is also known as a FLAT:

In a flat correction the first actionary wave, wave W, lacks sufficient downward force to unfold into a full five waves, the X wave reaction seems to inherit this lack of countertrend pressure and, not surprisingly, terminates near the start of wave W. Wave Y, in turn, generally terminates beyond the end of wave W. Degree of extension varies by the nature of the flat and the associated sentiment behavior.

Wave W

Following chart shows wave W (from Sept 2011 to Jan 2012). As one can see this wave can be easily sub-divided into 3 sub-waves. 3-waves, as mentioned above, indicate market correction and therefore, we can say that from the very start of this decline Gold was only supposed to undergo a correction, and was not entering a new long term (10+ years) bear market.

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Wave X
Moving forwards, we can see wave X in the following chart (from Jan 2012 to Oct 2012). This wave is again sub-divided into 3 waves, with waves a and c being equal. This development highlighted the fact that Gold's rally in first half of 2012 was just Wave X, and there was one more decline left. This decline would complete the correction that started in September 2011.

Wave Y
Finally, following chart shows wave Y, which is sub-divided into a clear 5 wave structure. Furthermore, each sub-wave can be easily sub-divided into 5-waves. This pattern is a classic 5-wave pattern, which was supposed to terminate the 3-3-5 pattern. After wave X was completed, we needed Wave-Y to complete the corrective pattern. 5-Wave decline from Sept 2012 has provided that needed decline phase.

Completion of 5-waves down should mark the completion of Wave Y decline. Collectively, this should mark the end of the flat pattern (3-3-5), which will give way to a new bull market.

One of the characteristics of Wave Y's is that it is accompanied by extreme selling force, and results in extreme pessimistic sentiment. Although we will be discussing Gold market sentiment in one of the upcoming updates, pessimism towards Gold is at all time highs. And this is a very constructive development to support the concept of bear market completion. Moreover, decline in Wave Y has been accompanied by extreme selling pressure, which is yet another hallmark of Wave Ys.

In short, from an intermediate term Elliott Wave perspective, it seems like Gold market has completed its correction phase and should soon embark on a long term rally.

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